ACCA FM · Guided practice (Show me how)
Chapter 5: Management of working capital (3) – Receivables and Payables
Settlement discounts: the effective annual cost
(a) Customer discounts. Customers currently take three months credit. We are considering offering a discount of 4% for payment within one month. Sales are $12,000,000 p.a. We are paying overdraft interest of 20% p.a. Calculate the effective % cost p.a. of the discount. Should we offer the discount?
(b) Supplier discounts. A company currently takes 40 days credit from suppliers on the basis that this is 'free' finance. Annual purchases are $100,000 and the company pays overdraft interest of 13%. Payment within 15 days would attract a 1.5% quick settlement discount. Should the company pay sooner in order to take advantage of the discount? Assume 365 days in a year.
The cost of offering a discount
Calculate the company's period cost and effective annual cost of the customer discount, and state whether the discount should be offered.
Refusing a supplier's discount
Calculate the company's effective annual cost of refusing the supplier discount, and state whether the discount should be taken.
The alternative approach
Calculate the company's additional overdraft, annual interest cost and net annual benefit from taking the supplier discount.
Opening this exercise…